Introductory Economics
Eco 108
HW 1

1. What is your opportunity cost of attending this class?

2. Consider an economy that has the choice of producing either guns or butter. All of its factors are equally suited to providing either guns or butter. In this economy what does the production possibilities frontier look like? Graph one. Does the principle of increasing costs apply to this economy? Why or why not?

3. Let the following be points on a country's production possibilities frontier.
   
   Table 1: Production Possibilities Frontier

   Number of cars	Bushels of Wheat
   0	30
   5	28
   10	24
   15	18
   20	10
   25	0

   • [a.] Plot the production possibilities frontier. (Put number of cars on the x-axis.)
   • [b.] Suppose the country is producing 10 cars. What is the opportunity cost of producing 5 more cars?
   • [c.] Suppose the country is producing 20 cars. What is the opportunity cost of producing 5 more cars? Does the principle of increasing costs apply to this economy? Why or why not?
   • [d.] Would this country ever produce 13 cars and 10 bushels of wheat? Why or why not?
   • [e.] Could this country produce 8 cars and 29 bushels of wheat? What about in the future?

4. Australia and New Zealand both produce sheep and wheat. Let Table describe the quantities each could produce in a typical month.
   Table 2: Sheep and Wheat Production

   	Sheep (thousands)	Wheat (metric tons)
   Australia	40	10
   New Zealand	5	2

   • [a.] Which country has the absolute advantage in sheep production? What about in wheat production?
   • [b.] What is the opportunity cost of producing 5 thousand sheep for each country?
   • [c.] What is the opportunity cost of producing 2 metric tons of wheat for each country?
   • [d.] Which country has the comparative advantage in sheep production? Which country has the comparative advantage in wheat production?
   • [e.] Suppose each country spends half of their time and resources producing each good. Show that both countries can be better off if New Zealand completely specializes, Australia spends 60% of its time and resources producing the good that it has a comparative advantage in producing, and they trade.

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